With adjustments and considerate marking (preliminary, needs careful doublechecking)…
Mean: 67.35
Median: 68.50
| Mark | Share | Cumulative |
|---|---|---|
| Firsts | 45.7% | |
| Attila | 26.9% | 72.6% |
Reading:
NS text : 11.2-11.4
additional material in handout on price discrimination
Topics:
causes of monopoly (brief)
profit maximization
What’s wrong with monopoly?
Price discrimination: first coverage; types of pd
Should we help companies tailor prices to your wage packet? (The Conversation, 2015)
Article: Should we help companies tailor prices to your wage packet?
With accompanying worked examples
… see also Examples in links, like
Somewhat more formal writeup:
The Government May Want to Encourage Price-Discrimination by Income, University of Essex Discussion Paper
(Topics in more detail)
What are monopolies and what are barriers to entry?
How do monopolies choose prices and quantities?
What are the social (welfare) consequences of monopoly?
What is ‘price discrimination’?
What forms can price discrimination take, and how does it increase a monopoly’s profits?
How does price discrimination affect social welfare, and whom does it help or hurt?
(Very briefly: other forms of imperfect competition)
Recall: under perfect competition
these are extreme assumptions; theoretical ideal
(Firms with market power might set \(p>mc\))
Opposite extreme: monopoly
Still, the more it charges the fewer units demanded. \(\rightarrow\) Chooses a price (or quantity) where MR=MC (like all firms do)
\(\rightarrow\) Produces ‘less than socially optimal quantity’ in order to charge a high price and increase its profit!
IRS/ Diminishing average cost over a broad range of output
\(\rightarrow\) ‘a natural monopoly’
(Here multiple firms producing separately are less efficient producers, cannot produce at the lowest cost)
Debatable: Special knowledge of a low-cost method of production, or key resource
Patents and copyrights
Exclusive franchise or license (granted by government, by another firm, by a university)
Government support for a dominant firm, discouraging/forbidding others
From the 2016 Massachusetts ballot initiative?
\(\rightarrow\) optimization where \(MR(Q) = MC(Q)\) (assuming \(P>AC\))
Criticisms of monopoly:
Other criticisms: Some argue the DWL above understates the true harm of monopoly
‘Secure’ monopolies don’t innovate as much, and spend wastefully?
Monopolies expend wasteful resources (lobbying, threats, lawsuits…) to preserve barriers to entry? \(\rightarrow\) further deadweight losses
Counters: Monopolies are SR only? Disciplined by potential entry, & have greater incentives to innovate?
Estimates of social cost of monopoly … range from 0.5% to 5% of GDP
Ground-breaking supermarket discount for students
Co-operative Food and NUS … announced a ground-breaking deal that will see students … receive a 10% discount on all groceries, at more than 3600 participating Co-operative food stores across the UK.
CJ Antal-Smith, Head of Commercial - Grocery at The Co-operative Food:
’Students are facing increasing financial pressures while studying, and are becoming more savvy when it comes to food shopping.
We wanted to help students, many of whom are living away from home for the first time, to live and cook on a budget."
Why would they do this?
Exeter Picturehouse:
Why such a complicated price list?
The practice of firms offering different prices to different consumers for the same product,
In general…
for a monopoly firm, the ability to identify consumers based on their WTP and charge distinct prices will increase profit.
… but it may increase or decrease social (consumer+producer) surplus
Consumer surplus itself may increase or decrease.
‘Uniform pricing’: Offering a single price for a good for all consumers.
This does not deal with differences amongst consumers.
‘Forces you’ to target a particular group (e.g., the wealthy) reducing total sales.
Under monopoly, this leads to a deadweight loss
Price discrimination may seem counter-intuitive: ‘how can offering some consumers lower prices increase profit?’
Higher prices \(\rightarrow\) greater profit per unit; but also higher price \(\rightarrow\) sell fewer units.
The more you charge the less you sell.
Groups of ‘less keen’ consumers are very sensitive to price; would buy little at high price \(\rightarrow\) lower price more profitable here.
Identifiable ‘keen’ consumers buy a lot even at a high price. ‘Less price-sensitive’: higher price more profitable here.
The firm can offer each individual a different price for each unit they purchase.
Assuming you know what the consumer is willing to pay, you can make the highest possible profit; that is called ‘perfect’ price discrimination.
Is this easy to do?
Is this ‘perfect’ PD?
Firm cannot differentiate between consumers , uses quality/quantity so consumers self-select.
Quality- Transport- Different classes, Supermarkets- budget products
Quantity- Supermarkets- Larger quantities at lower prices per unit; i.e., ‘nonlinear pricing’
8 oz coffee for 1.60 vs. 16 oz. for 2.00
20 p per oz vs. 12.5p per oz.
With linear pricing there would be the same price of 15p/oz. - Result: with 2 prices monopoly can get ‘high value’ consumers to buy/get more in total without losing ‘low-value’ consumers
But may know on average that flyers with higher wtp for travel also value comfort more… thus:
Make second-class seats very uncomfortable, first-class luxurious, and charge more for first-class seats
Can get consumers with higher values for travel and comfort to pay more, without losing lower-valuing customers
Train companies must price first and second class such that consumers will self-select.
The firm can differentiate groups of consumers or ‘local markets’, not individuals.
Each group has a different willingness to pay on average
\(\rightarrow\) Offer lower prices to lower-valuing groups, higher prices to higher-valuing groups
Each group or market has it’s own demand \(\rightarrow\) marginal revenue curve
\(\rightarrow\) So set an optimising price quantity separately for each group
E.g., a discount for the elderly, higher price for the middle-aged
Or a lower price in Portugal than in Germany
Another depiction, adding demand curves (‘average revenue’):
Net welfare result: theoretically uncertain
For consumers:
Two factors (may) trade off… Exchange and Top-level efficiency … who eats the quiche vs amount of quiche baked
Exchange efficiency
When ‘low and high valuation’ groups can be identified
high-valuation groups charged more, thus consume less (vs uniform price)
low-valuation groups get charged less \(\rightarrow\) consume more
This is bad, it reduces “exchange efficiency” but…
Production and allocative efficiency: On the other hand PD can lead more to be produced/consumed
E.g., suppose that with a ‘uniform price’ only the wealthy went to a restaurant…
after PD (early-bird, OAP, benefits discounts) the low-income may also dine in the restaurant
\(\rightarrow\) more value is produced
Two effects trade off: negative ‘exchange efficiency’ impact, potentially positive impact on production
…of the otherwise underproduced good (rem DWL of monopoly)i
\(\rightarrow\) top-level efficiency may increase (or decrease)
Bc ‘exchange efficiency effect’ is negative, 3DPD can only be beneficial if quantity increases (necessary but not sufficient condition)
If, e.g., elderly who get discounts could sell products to middle-aged, can OAP discounts work?…
Middle-aged would ask them to do this, never pay high price
Firm could no longer profit from this
Similar issues with quantity discounts, or ‘web cookie’ personalised pricing
So PD only ‘works’ for hard-to-trade goods like haircuts, or where purchases are frequent & low-value, resale markets difficult
People with low-incomes tend to have lower-wtp for most goods
Government can typically identify and verify incomes
Governments could allow and encourage low-income consumers to get an ID indicating this
Governments could allow and encourage firms to use this for price-discrimination
Firms would increase profit
Low-income households would benefit, reducing inequality
\(\rightarrow\) Government may want to allow/enforce monopoly privileges but regulate price it can charge
Difficulty: Government wants to regulate \(p=AC\), but it doesn’t know firms’ actual cost function (asymmetric information)
Basic ideas about:
…what ‘price discrimination’ is and why firms use it
…what the forms of price discrimination are (1st-3rd degree; perfect, self-selection, market-separation)
#(We may skip): IMPERFECT COMPETITION ##(We may skip): IMPERFECT COMPETITION
With multiple firms in the same market but not complete ‘free entry’, theory predicts a range of possible outcomes.